Live Patent Auctions Tantalize Inventors

Mixed results leave attendees heartened but not sold

A day before the 19 April auction, Bob Pilley, a self-proclaimed ”sparky,” sat at a bland white table in a hotel convention room in Chicago. In front of him, a television showed a video describing the grisly details of Comair Flight 3272, which crashed in 1997 en route to Detroit, killing 29 people.

”Do you remember Tenerife? That’s why we’re doing this,” Pilley said. In 1977, two planes collided on a foggy runway in the Canary Islands, killing 583 people. Pilley, an electrical engineer and independent inventor, rattled through his standard pitch. He was trying to stir up interest in a group of patents he owned that apply Global Positioning System (GPS) and mapping displays to airplanes and airport facilities. The following day, his patents would be auctioned off by Ocean Tomo, a Chicago-based company that specializes in financial services relating to intellectual property.

”In many cases, finding a good home for someone's life’s work is a difficult task,” Pilley said. Formerly employed by the Federal Aviation Administration, he quit his job more than 10 years ago to develop a system that he thought the aviation industry could use. ”I’ve knocked on the door of a number of large corporations trying to find a home for my patents,” Pilley said. But none of his corporate suitors was willing to commit. Now all that was left was to distribute a few more pamphlets explaining the idea behind his GPS method [to see one of Pilley’s patents, click here.] It was a last-ditch effort by him and the inventors at neighboring booths to showcase their work, but few people came by. ”It’s been a long road for me,” he said.

Having exhausted all the options he knew, Pilley decided to try selling his patents through Ocean Tomo, in the hope that the company’s patent matchmakers might rustle up new potential buyers. Traditionally, intellectual property changes hands as a result of protracted negotiations conducted in private with one or two companies and takes anywhere from a few months to a year to complete. An auction, by contrast, theoretically brings all potential buyers to one setting to make their plays at one time, so that the market can assess what it takes to be the true value of intellectual property.

Ocean Tomo claims to be the first company to offer live intellectual property auctions, and in many respects it may well be a pioneer. Online patent auctions have been around for the last five years and serve as a way for companies to off-load unused intellectual property or help a bankrupt company pay off its creditors. Specialized Web sites that sell patents exist—such as ipAuctions.com and FreePatentAuction.com—and eBay, the popular auction site that traffics primarily in consumer goods, also regularly lists a handful of patents for sale. What has made Ocean Tomo’s past three auctions unique is the company’s ability to offer a large number of patents and trademarks—approximately 180 total for the auction on 19 April, often with multiple patents per lot—drawn from all corners of technology and invention.

On the day of this auction, Charlie Ross, a practiced auctioneer, moved swiftly through multiple bids and sold the first few lots. Bellowing crisply in British English, he collected bids from attendees raising paddles in the crowd and from anonymous telephone callers. Ross soon reached Pilley’s offerings, Lot 5, and he announced an absentee bid of US $385 000. Pilley had hoped to score $500 000, but silence followed as Ross probed the crowd for more bids. The $385000 figure met Pilley’s reserve price, and the gavel slammed down to close bidding on Lot 5. In mere minutes, a chapter in Pilley’s life had closed.

The auction raked in a total of $11.4 million that day and covered patents pertaining to automotive engineering, telecommunications, and location-based networking and gaming, among other things. The sellers were about as diverse as the lots and included the University of Texas, numerous private inventors, and data storage company Iomega Corp., in San Diego. Though tilted toward high-tech work, there were also some more offbeat lots, such as a patent portfolio on making vacuum-sealed diapers, which purported to reduce the size of an individual diaper significantly.

The point, for Ocean Tomo, is to inject some glamour into the stodgy world of patent acquisition and to speed up what is often a long and drawn-out negotiation between one or two companies. Though potential buyers and sellers alike remain skeptical that live auctions are more than glorified flea markets, some recent multimillion-dollar sales suggest that intellectual property auctions may be catching on. One Westport, Conn.based firm, Image Telecommunications Corp., walked away with the most cash, a little more than $3 million, for its portfolio of video-on-demand patents. Indeed, Ocean Tomo is not alone in this peculiar niche auction spot. In mid-May, Grünwald, Germanybased Intellectual Property Auction (IPA), hosted in Munich what its auction manager, Boris Peters, claims is Europe’s first live intellectual property auction. The Munich event, which led to less than $675 000 in sales, was largely considered a flop, but the company attributes the meager results to companies not having had enough time to study the patents beforehand. Ocean Tomo staged its own European auction this June, in London, and collected $8.1 million on the auction floor.

”I think the jury’s still very much out on whether this is something that works,” said James Logan, chief executive of Emergent Technologies, in Candia, New Hampshire, a patent licensing and technology development company. Logan, a serial private inventor, was scoping out the scene as a possible venue for offloading some of his intellectual property. ”I would always try and find a corporate buyer outside, but if that failed I might consider an auction,” Logan said afterwards. ”It seemed like there were some promising big sales.”

Others concluded that the April auction had gone in a direction not well suited to their wares. James D. Wright, a patent attorney from the Charlotte, N.C.based firm Tillman Wright, noted that only three of seven items in the Consumer Products/Electronics category sold, a lower success rate than in all other categories. His firm was representing the vacuum-sealed diaper lot, which didn’t attract any bidders. ”It’s not like we lost the asset itself, it just didn’t happen to sell that day,” Wright later reflected. Despite a glum afternoon, he concluded that Ocean Tomo’s high-tech focus at this auction—whether intentional or not—hadn’t drawn the right audience for their product and was not an indication of the fate of the diaper patents [to see one of the patents, click here.] ”We’re looking forward to opportunities that still exist for us,” Wright said.

A few fundamental issues may confound intellectual property auctions. For example, when a valuable work of art is put up for auction, a forgery expert verifies that it is not a counterfeit by comparing it with other works by that artist, analyzing the methods used to make the piece, determining the age of the materials, and so forth. The strength of a patent, in contrast, lies in its uniqueness, and finding an appropriate monetary value for that is an imperfect science. ”Intellectual property has some special features,” said Paul Klemperer, an economics professor at the University of Oxford who studies auction theory. ”In particular, prospective purchasers may need to spend a lot of money to work out the value of them.”

Before a company buys a patent, the purchaser goes through a lengthy process to make sure that no pre-existing patents could invalidate its claims. A patent might seem valuable one day, but an antagonist might challenge its validity the next, based on some other prior art. That’s one fundamental reason that patent negotiations can stretch on for months and months. What’s more, patent law is unpredictable and constantly evolving, as a U.S. Supreme Court decision this spring, on KSR International v. Teleflex , has shown. In ruling on this dispute, which involved the legitimacy of a patent on combining car accelerator pedals with electronic sensors, the court said that the invention was not sufficiently ”nonobvious,” which is one of the key requirements for obtaining a patent. This ruling alone may have sweeping implications for the validity of existing patents. Between researching prior art and navigating a changing legal landscape, investing in intellectual property can be much riskier than buying a painting.

But selling patents at live auctions may address at least one uncertainty in the patent-purchasing process, which is assessing market demand for the asset. ”As people who have been to auctions know, you really don’t know what’s going to happen,” Pilley said. ”And as a private inventor, it doesn’t get more exciting than that.”